Krugman in Wonderland

Sometimes you cannot make this stuff up. The lead Keynesian Cheerleader, Paul Krugman, contradicts himself when trying to throw a Repub down the rabbit hole. In his textbook on macoeconomics he blamed “Eurosclerosis” (persistent high unemployment) on unemployment benefits:

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.

Now he encourages extended unemployment benefits. From a blog wonderfully entitled Krugman-In-Wonderland, here is Krugman’s case:

What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.

The snarky remark is what he touts as “what textbooks say” is the opposite of what HIS textbook says. So it is ok to create persistent unemployment and Amerosclerosis since it somehow stimulates the economy? There are so many things wrong with this sort of advice it is hard to know where to start. I happen to favor extended unemployment right now for reasons of compassion, to bridge people through the downturn, but not to somehow stimulate the economy.

Stimulus is not the end, but a means to the end. What good is “stimulus” if it leaves us stuck with high levels of unemployment and reliance on government life support to sustain a moribund economy?

Amazingly, Krugman goes back through the looking glass again yesterday on this issue, as also reported by Krugman-In-Wonderland:

I hear through the grapevine that the usual suspects at the WSJ have put out something along the lines of “Krugman says that unemployment benefits won’t raise unemployment, but in his textbook he says they will, neener neener.” Are they really that stupid? Probably not — but they you think that you, the reader, are that stupid.

“Neener neener”? That passes for sophisticated dialog? It bodes very poorly for the punditry to be so thin-skinned that any criticism is met with childish ridicule. I guess that is why Krugman goes on to make this naive and childish comment:

What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant.

The Krugman in Wonderland post dissects that remark. It assumes that at some times incentives work, and at other times they don’t, a proposition with no foundation in theory or practice.

Ask yourself why there is a lack of demand for what workers produce? Could it be the huge Stimulus has primarily gone to things people have little demand for, specifically, the continued increase in government jobs and wages at the expense of the productive sectors of the private economy? Or, the rathole of subsidies for Clunkers and Homes that simply pull future demand forward, but leave no lasting improvement?

This is but one of a number of Krugmanisms. More on Krugman’s follies here.

UPDATE: I want to elevate an interesting discussion on this post that occurred outside of the comments. A reader’s ripose was the following:

His textbook addresses a general situation:

“Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect.”

but his column addresses a specific situation:

“when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment.”

If that distinction isn’t clear, let’s try an illustration: Does it matter at all whether the gov’t funds its spending via taxes or via debt ?

Answer (you can Google Stiglitz on this; trust me please): it depends on whether the economy is at or above full employment or substantially below that level. Deficit spending is harmful in the first instance, but beneficial in the second.

Good stuff. I got the distinction, but clearly should have expanded on why it fails to convince.

Krugman is asserting that giving people money (under any rubric – unemployment, tax credits, welfare) stimulates the economy such as to reduce unemployment. My counter to it that any such effect (which is really hard to substantiate) only lasts as long as the money is being given away. When govt life support ends, so does the faux stimulus and those jobs.

What Stiglitz, Krugman et al overlook is that “aggregate demand” is not a fungible lump of spending. It matters a lot where the deficit is put, where the govt stimulus goes. If it goes into more govt jobs at higher pay it reduces investment into private and productive jobs.

Until we restart private investment, we remain in a limbo that is sustained only as long as the bond market or the voters allow. While we can fool the bond market for a while longer, the voters are restless. Maybe they can see beyond Krugman’s claims? Or more likely stopped listening to Keynesian Cheerleading a while ago. It boggles sense that a government can borrow its way into the poorhouse and create prosperity.

For investors, we have the following dilemma: some sort of recovery seems real, but it is based on government life-support, and is being led by people with a very ahistorical view of how economies work. Rather than rely on real incentives and reform, they rely on gimmicks and puffery. The economy needs a revitalization of the private sector, which creates real jobs, not Keynesian cheerleading. I stand by the view that after a “recovery-less recovery” in 2010 we slip back down in a double dip as the real problems have not been addressed.

About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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